The entrepreneurship of resource-based theory

The entrepreneurship of resource-based theory

Sharon A. Alvareza,* Lowell W. Busenitzb

aThe Fisher College of Business, 860 Fisher Hall, The Ohio State University, 2100 Neil Avenue, Columbus,OH 43210-1144, USA

bUniversity of Oklahoma, 307 W. Brooks St., Norman, OK 73019-4006, USA

Received 9 February 2001; received in revised form 4 September 2001; accepted 20 September 2001

“In a Resource-based view, discerning appropriate inputs is ultimately a matter ofentrepreneurial vision and intuition, the creative act underlying such vision is a subject

that so far has not been a central focus of resource-based theory development”(Conner, 1991, p. 121).

Abstract

This paper examines the relationship between resource-based theory and entrepreneurship anddevelops insights that advance the boundaries of resource-based theory and begin to address importantquestions in entrepreneurship. We extend the boundaries of resource-based theory to include thecognitive ability of individual entrepreneurs. Entrepreneurs have individual-specific resources thatfacilitate the recognition of new opportunities and the assembling of resources for the venture. Byfocusing on resources, from opportunity recognition to the ability to organize these resources into afirm and then to the creation of heterogeneous outputs through the firm that are superior to the market,we help identify issues that begin to address the distinctive domain of entrepreneurship. © 2001Elsevier Science Inc. All rights reserved.

1. Introduction

Early work on resource-based theory (RBT) acknowledged that entrepreneurship is anintricate part of the resource-based framework (Connor, 1991; Rumelt, 1987). However,while RBT has become a dominant paradigm for strategic management research (Peteraf,

* Corresponding author. Tel.: �1-614-445-8356; fax: �1-614-292-7062.E-mail address: [email protected] (S.A. Alvarez).

Pergamon

Journal of Management 27 (2001) 755–775

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1993), the interface between RBT and entrepreneurship has amounted to little more thanproviding a “research setting” for empirical work (e.g., Chandler & Hanks, 1994). Becauseof the lack of consideration given to entrepreneurship by most resource-based research,current RBT largely fails to integrate creativity and the entrepreneurial act (Barney, 2001).An understanding of how entrepreneurial actions, the creation and combining of resourcesthat create new heterogeneous resources, can inform RBT by suggesting alternative uses ofresources that have not been previously discovered leading to heterogeneous firm resources.It is the firm’s unique bundle of resources that is different from competitor firms that arepotentially valuable and contribute to a firm’s competitive advantage.

Much prior research on entrepreneurship can be characterized as either work that de-scribes the phenomena or work that borrows theories ad hoc from other disciplines. Whilean entrepreneurship context provides an excellent setting for much empirical research, thefield of entrepreneurship needs to move further to create specific boundaries to establish thefield’s legitimacy and distinctive contribution (Busenitz et al., 2001). One of several chal-lenges with entrepreneurship scholarship is that research settings often span several units ofanalysis leading to fragmentation of the field.

Entrepreneurial opportunities exist primarily because different agents have differentbeliefs about the relative value of resources when they are converted from inputs into outputs(Schumpeter, 1934; Kirzner, 1979; Shane & Venkataraman, 2000). Indeed, heterogeneity isa common attribute of both resource-based and entrepreneurship theory—although resource-based logic has tended to focus on heterogeneity of resources while entrepreneurship theoryhas tended to focus on heterogeneity in beliefs about the value of resources. However, whenit is recognized that beliefs about the value of resources are themselves resources, apparentconflicts between the two theories are resolved.

Put differently, entrepreneurship and RBT adopt precisely the same unit of analysis—theresource. These resources may manifest themselves in several different ways. For example,firm-specific resources may reflect cognitive differences between managers in these firms.The different ways that resources, and the opportunities to exploit these resources, manifestthemselves have resulted in different units of analysis and has hindered good theorydevelopment in the field of entrepreneurship. In this paper we examine entrepreneurshipfrom individual opportunity recognition, to the firm’s organizational capabilities, to themarket, however in all three instances the resource is the unit of analysis. Through theintegration of resources, from cognitive differences to opportunity recognition to the abilityto organize these resources into a firm, we may begin to address the issue of the distinctivedomain of entrepreneurship.

This paper has two primary purposes. First, we extend the boundaries of RBT byintroducing two entrepreneurial concepts: 1) entrepreneurial recognition, which we define asthe recognition of opportunities and opportunity seeking behavior as a resource and 2) theprocess of combining and organizing resources as a resource. The second goal is to buildtheory for the field of entrepreneurship that can potentially span micro to marco issues byfocusing on resources as the unit of analysis. This effort is organized around the fourconditions of RBT: resource heterogeneity, ex post limits to competition, imperfect factormobility and ex ante limits to competition (Peteraf, 1993). By examining entrepreneurship,which we define as the recognition and exploitation of opportunities that result in the creation

756 S. A. Alvarez, L. W. Busenitz / Journal of Management 27 (2001) 755–775

of a firm that seeks to obtain entrepreneurial rents, through the four conditions of RBT wetheoretically inform and extend current research in both RBT and entrepreneurship.

2. Resource heterogeneity

Resource heterogeneity is the most basic condition of resource-based theory and itassumes at least some resource bundles and capabilities underlying production are hetero-geneous across firms (Barney, 1991). Resource-based theory suggests that heterogeneity isnecessary but not sufficient for a sustainable advantage. For example a firm can haveheterogeneous assets, but not the other conditions suggested by resource-based theory, andthose assets will only generate a short-term advantage until they are imitated.

Similar to RBT, heterogeneous resources are also a basic condition of entrepreneurship(Kirzner, 1997). Entrepreneurial opportunities are thought to exist when different agentshave insight into the value of resources that other agents do not, and the agents with theinsight act upon these un-exploited opportunities (Kirzner, 1979; Casson, 1982). If theseagents are correct, an entrepreneurial rent will be earned; if not an opportunity loss will occur(Rumelt, 1987; Alvarez and Barney, 2000).

Since the 1991 Journal of Management special issue on the resource-based model,strategy researchers have become increasingly aware of the importance of heterogeneousfirm assets (relative to competitor firms) in achieving a firm’s sustainable competitiveadvantage. Barney (1986) and Dierickx and Cool (1989) were the first to draw attention tothe importance of tacit socially complex assets. Paradoxically, while the importance ofresource heterogeneity among firms has been acknowledged, strategists have given scantattention to the process by which these resources are discovered, turned from inputs intoheterogeneous outputs, and exploited to extract greater profits. Thus, we argue that entre-preneurship is about cognition, discovery, pursuing market opportunities, and coordinatingknowledge that lead to heterogeneous outputs.

2.1. Entrepreneurial cognition and heterogeneity

There is probably no group of individuals that have received more discussion and havebeen assumed to be more heterogeneous from the rest of the population than entrepreneurs.The notion that entrepreneurs were somehow different from the rest of the populationprovided the impetus for substantial research on the subject in the 1960s and 1970s. Most ofthis research focused on a host of traits such as risk-taking and the need for achievement, butunfortunately, the findings have been disappointing (for a review, see Low & MacMillan,1988). Recently, the emergence of cognitive approaches to understanding how entrepreneursthink and make strategic decisions is showing much promise (Busenitz & Barney, 1997;Baron, 1998; Forbes, 1999). If entrepreneurs do indeed have a unique mindset or orientation(Lumpkin & Dess, 1996), then it follows that their cognitive approaches are likely to havestrengths and weaknesses in various competitive environments and are a potential source ofcompetitive advantage (Barney, 1991).

In clarifying how entrepreneurs think, Busenitz and Barney (1997) found that entrepre-

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neurs use heuristics more extensively than managers in larger organizations. The term“heuristics” refers to simplifying strategies that individuals (entrepreneurs in this case) useto make strategic decisions, especially in complex situations where less complete or uncer-tain information is available. Entrepreneurial cognition is defined here as the extensive useof individual heuristics and beliefs that impact decision-making (Busenitz & Lau, 1996;Wright, Hoskisson, Busenitz & Dial, 2000). Managerial cognition is referred to as moresystematic decision-making where managers use accountability and compensation schemes,the structural coordination of business activities across various units, and justify futuredevelopments using quantifiable budgets. In sum, managerial cognition is more factual-basedwhile entrepreneurial cognition builds from limited or key experiences and beliefs.

Most of the research on cognition has generally assumed that individuals tend to makedecisions (and the use of heuristics) in a similar fashion and are susceptible to commonerrors. However, recent research on cognition indicates that entrepreneurs use heuristics intheir decision-making more than their managerial counterparts in large organizations (Baron,1998; Busenitz & Barney, 1997). Consequently, they often make significant leaps in theirthinking leading to innovative ideas that are not always very linear and factually based. Thisresearch stream is now starting to recognize that entrepreneurs’ more extensive use ofheuristics in their decision making is at least a partial extension of who they are asindividuals (e.g., Baron, 1998; Wright et al., 2000). Without attention to these cognitiveprocesses, our understanding of entrepreneurs is significantly limited. This has particularimplications for entrepreneurs because they regularly find themselves in situations that tendto maximize the potential impact of various heuristics (Baron, 1998).

In probing these cognitive processes, it is important to first understand the utility of suchdecision-making. Given the high ambiguity and uncertainty that entrepreneurs typically facein the pursuit of a new venture, the willingness and confidence to readily rely on heuristicsto piece together limited information to make convincing decisions may be virtually the onlyway to progress forward (Busenitz & Barney, 1997). The use of a more factual-based logicin the pursuit of new opportunities becomes too overwhelming and very costly if notimpossible. The decision-making contexts facing entrepreneurs also tend to be more com-plex. The heuristic-based logic can have a great deal of utility in enabling entrepreneurs tomake decisions that exploit brief windows of opportunity (Tversky & Kahneman, 1974)whereas the elaborate policies, procedural routines and structural mechanisms common tothose with more of a managerial cognition (managers in large organizations) are likely toerect barriers in the pursuit of innovative activities.

Central to most models of learning is the issue of achieving new understandings, inter-pretations and insights (Daft & Weick, 1984). Learning in the context of entrepreneurshipmay also have some important links to the use of heuristics in decision-making. Sources ofcompetitive advantage are thought to potentially evolve around knowledge-creation anddecision-making capabilities (Barney, 1991). Lower-level learning tends to follow the morerational model by focusing on repetitious observations and routinized learning. Such learningtends to be short-term and temporary (Fiol & Lyles, 1985). Consistent with the notion ofsingle-loop learning, there are few changes in underlying policies or values (Argyris &Schon, 1978). Such learning modes tend to be slower and more imitable (Lei, Hitt & Bettis,


1996), in part because decision-makers usually build on results from repeated outcomes ofsuccess or failure to reach their decisions.

Higher-level learning involves the formation and use of heuristics to generate new insightsinto solving ambiguous problems (Lei et al., 1996). Such learning tends to create newinsights and direction for emerging paths to solve specific problems. While the heuristic-based logic may use less information and be less accurate, use of individual-specific clustersof knowledge facilitates quick adjustments to emerging trends (Krabuanrat & Phelps, 1998).

Taken together, the more frequent presence of heuristic-based logic in decision making byentrepreneurs (Busenitz & Barney, 1997) suggests that they think differently leading them tomake decisions in fundamentally different ways from those that approach things in a morefactual manner such as managers in large organizations. This heuristic-based logic enablesentrepreneurs to more quickly make sense out of uncertain and complex situations. Suchdecision approaches can lead to forward-looking approaches (Gavetti & Levinthal, 2000)perceiving new opportunities, faster learning and unorthodox interpretations (innovations).In essence, this closer look at the potential advantages and disadvantages of a heuristic-basedlogic sheds important light on how entrepreneurial cognition can be a source of competitiveadvantage. If the insights and decisions reached with heuristic-based logic are potentiallyvaluable in the market, if they are indeed rare, if they are difficult to imitate, and if thegenerated ideas are exploited by the entrepreneurs, then these entrepreneurial insights anddecisions are a resource that can potentially lead to a competitive advantage.

In sum, it appears that those who use a heuristic-based logic cannot only make fasterdecisions, but they also learn more quickly. We argue here that those with an entrepreneurialcognition can facilitate a potential competitive advantage in at least two important ways. Thefirst area has to do with the discovery of new opportunities. An entrepreneurial cognitionperspective provides a way for us to better understand why some individuals are able to seenew opportunities where most others see either a benign environment or emerging threats.The second area involves the development of a firm in the initial stages of organizationaldevelopment. A heuristic-based decision style may allow them to readily navigate through awide array of problems and irregularities inherent in the development of new firms. We nowdiscuss these two areas.

2.2. Entrepreneurial discovery and heterogeneity

One of the fundamental reasons for the fascination with entrepreneurs and the inventionsthat they develop seems to center around why and how they see and create new opportunities.An entrepreneurial opportunity invariably involves the development of a new idea that othershave overlooked or chosen not to pursue. In the context of environmental change, those withan entrepreneurial cognition orientation often see new opportunities where others tend to beconcerned with protecting themselves from emerging threats and changes. The cognitiveability of entrepreneurs to frame situations in an opportunistic manner is a heterogeneousresource that can be used to organize other resources.

Explanations for entrepreneurial discovery have evolved primarily around two perspec-tives: 1) the searching for and obtaining of information leading to new inventions and 2) therecognition process by which new discoveries are made. From the search perspective,


discoveries are generally modeled to be the result of an extensive search targeted in thedirection where the discovery is to be made (Stigler, 1961; Caplan, 1999). This stream ofresearch generally assumes that entrepreneurs know a priori where the invention needs to bemade and can accurately weight the cost and benefits of acquiring new information relevantto the invention.

In arguing that the search for discovery cannot be accurately modeled as a rational searchprocess, Austrian economists have posited that the focus should be on the process side ofdiscovery. More explicitly, Kirzner (1979) developed the term “entrepreneurial alertness” asthe ability to see where products (or services) do not exist or have unsuspectedly emergedas valuable. Alertness exists when one individual has an insight into the value of a givenresource when others do not. From this perspective, entrepreneurial alertness refers to“flashes of superior insight” that enable one to recognize an opportunity when it presentsitself (Kirzner, 1997). In distinguishing between entrepreneurial alertness and the knowledgeexpert, Kirzner (1979) argues that the knowledge expert does not fully recognize the valueof their knowledge or how to turn that knowledge into a profit or else the expert would bean entrepreneur. The entrepreneur may not have the specific knowledge of the expert (suchas technological expertise) but it is the entrepreneur who recognizes the value and theopportunity of the expert’s knowledge. While the entrepreneur may have specialized knowl-edge it is the tacit generalized knowledge of how to organize specialized knowledge that isthe entrepreneur’s critical intangible resource.

In the case of entrepreneurship the specialized knowledge is often knowledge aboutopportunities created by the environment or a new product or even the opportunities of apotential new product. As we uncover the phenomenon surrounding entrepreneurial cogni-tion, it is becoming clearer why entrepreneurs see new discoveries more readily than theircounterparts. Their heuristic-based logic appears to give them a competitive advantage inquickly learning about new changes and what the implication of those changes are for thedevelopment of specific discoveries.

2.3. Market opportunities and heterogeneity

Debate in the field of entrepreneurship has sometimes focused on whether or not theperfect competition model applies in explaining entrepreneurial behavior (Kirzner, 1997;Shane & Venkataraman, 2000). However, a second, albeit related, question has received lessattention: under what conditions can entrepreneurial opportunities be most efficiently real-ized through market exchanges, and under what conditions can they most efficiently berealized through nonmarket forms of exchanges.

Entrepreneurs can use market forms of governance to coordinate many resources neces-sary to realize an economic opportunity; they also can use a firm, as a form of hierarchicalgovernance, to realize these opportunities. The conditions under which these alternativeforms of governance will be more or less effective have yet to be described in theentrepreneurship literature. Put differently, this question becomes when is it less costly forthe entrepreneur to coordinate the resources and disparate knowledge needed to realize aneconomic opportunity through a firm and when is it less costly for the market to coordinate


these resources? The answer to these questions would constitute a theory of the entrepre-neurial firm.

When the completion of a transaction requires specific investments, more hierarchicalforms of governance will be preferred over less hierarchical governance (Williamson, 1975).In the context of the realization of entrepreneurial opportunities, when these opportunitiesrequire economic actors to make highly specific investments, firms will be preferred overmarkets as a way to realize an economic opportunity.

Resource-based logic identifies the kinds of resources and capabilities that require specificinvestment in order for their full economic value to be realized–resources and capabilitiesthat are socially complex, path dependent, tacit, and so forth (Barney, 1995). Thus, when therealization of the economic value associated with an entrepreneurial opportunity depends onthe use of socially complex, path dependent, or tacit resources and capabilities, it is morelikely that hierarchical governance—a firm—will be used to realize this value than nonhi-erarchical governance.

These ideas suggest that conditions which require the efficient coordination of andintegration of knowledge are those in which entrepreneurial firms are likely to arise in aneconomy (Coase, 1937; Hayek, 1945; Kirzner, 1997). Schumpeter (1934) distinguishedbetween invention and innovation, with invention being the discovery of an opportunity andinnovation the exploitation of a profitable opportunity. The importance of the distinctionbetween invention and innovation is that it focuses on the firm as a problem solvinginstitution (Demsetz, 1991). Instead of concentrating on the market, the focus is on the roleof entrepreneurship as the integration of disparate specialized knowledge (as suggested byboth Schumpeter and Coase). Firm formation is essentially an entrepreneurial act because tocoordinate and transmit tacit knowledge the coordination of the firm is required.

The entrepreneur’s ability to convert creative insights and often homogenous inputs intoheterogeneous outputs make the firm a superior choice over the market. The classic story isthat profit maximization and efficiency require the substitution of firms for markets if the costof using markets becomes large relative to the cost of the entrepreneur forming a firm (Coase,1937). In its simplest form, if the market transaction cost is zero and the entrepreneurial firmcost is greater than zero the entrepreneurial firm will not exist. However, it is not a trivial taskto distinguish purchase prices across markets from firm production prices because firmproduction involves the use of inputs that are purchased. Therefore, the transformation ofinputs into outputs by the firm must also result in homogeneous firms in-order for marketsto be substitutes for firms. Up until now we are assuming that the production costs of firmsdo not take into account differences in knowledge or knowledge costs. However becauseknowledge is not free and it does differ across firms, firms are heterogeneous and theentrepreneur’s coordination of specialized disparate knowledge makes the heterogeneousfirm a superior choice over markets. Firms are a bundle of commitments to technology,human resources, and processes all blanketed by knowledge that is specific to the firm. It isthis bundle, and how the entrepreneur coordinates this bundle, that allow firms to beheterogeneous and thus these firms cannot be easily altered or imitated.

Hayek (1945) further expands on the importance of learning and knowledge in theentrepreneurial process. In this view the entrepreneur experiences both partial ignorance andlearning at the same time. The ignorance is a result of uncertainty about the future. The


learning however, is a result of buyers and sellers learning to adjust their behavior over timeto conduct their transactions at the optimal level. The entrepreneurial process in this sense isabout information discovery of the market and the coordination of disparate tacit knowledge.What distinguishes this view of the entrepreneur as a pure buyer and seller (markets) and theentrepreneur as the exploiter of opportunities (firms), is the incorporation of learning andknowledge. If the application of knowledge requires coordinating many types of specializedknowledge then the firm is required for the integration of knowledge.

2.4. Coordinated knowledge and heterogeneity

Entrepreneurial knowledge is the ability to take conceptual, abstract information of whereand how to obtain undervalued resources, explicit and tacit, and how to deploy and exploitthese resources. Both Kirzner (1979) and Schumpeter (1934) describe the entrepreneurialrole as the decision to direct inputs into certain processes rather than into other processes.Entrepreneurship involves what Schumpeter termed “new combinations” of resources.Schumpeter (1934) described the entrepreneur as the one who combined productive factorsin some new way, a product, production method or a market. He further maintained thatinnovation was driven by the entrepreneur (who is at the heart of the firm) and not consumerdriven (markets). Schumpeter suggested five situations where the phenomena of bundlingresources by entrepreneurs to produce new resources occurs. The entrepreneur “reforms orrevolutionizes the pattern of production by exploiting an invention or an untried technologyfor producing a new commodity or producing an old one in a new way, by opening up a newsource of supply of materials, or a new outlet for products, or by reorganizing an industry”(Schumpeter, 1934, p. 132).

The focus of most current entrepreneurship research into opportunities has been onmarkets (Kirzner, 1997). This is true whether the market is a product market or a factormarket (Shane & Venkataraman, 2000). However, once the discussion turns to factormarkets and thus production (the creation of value through the transformation of inputs intooutputs) there becomes a need for the coordination of numerous types of specializedknowledge (Grant & Baden-Fuller, 1995).

Knowledge comprises information, technology, know-how, and skills (Grant & Baden-Fuller, 1995) and can either be explicit such as in technology or tacit which is personal andmore difficult to communicate (Polanyi, 1962) or imitate (Barney, 1991). Individuals acquireknowledge and individuals store tacit knowledge. However until it is coordinated, knowledgeis often dispersed, fragmented, and sometimes even contradictory. The entrepreneurialproblem is how to secure the best use of resources to obtain a profit. Thus entrepreneurialknowledge is an abstract knowledge of where and how to obtain these resources. When themarket is unable to organize distributed knowledge the entrepreneur understands this andcapitalizes upon the opportunity resulting in a new firm. Therefore, it is not the market thatorganizes tacit knowledge, in fact it is often the case that markets are inefficient at knowledgetransfer and integration, it is the firm that efficiently organizes knowledge. The primary roleof the firm is the integration of specialized knowledge (Demsetz, 1991; Conner & Prahalad,1996).

Because the primary role of the firm is the integration of specialized knowledge, we then


go back to our question, “when are markets more efficient at organizing knowledge and whenare entrepreneurial firms more efficient at organizing knowledge?” Since individuals havecognitive limitations the acquisition of knowledge is often specialized. Specialized knowl-edge is usually achieved at the expense of generalized knowledge. However, to applyknowledge the need is not just for specialized knowledge but perhaps more importantly forgeneralized knowledge. Therefore, if efficiency is the acquisition of specialized knowledge,the application of knowledge requires generalized knowledge and a means for the integrationof knowledge.

Markets are inefficient at integrating knowledge because explicit knowledge can be easilyimitated and tacit knowledge cannot be articulated (Grant & Baden-Fuller, 1995). Explicitknowledge has the character of a public good it can be transferred at low cost. Once explicitknowledge is made known, it is easily imitated and it becomes incapable of generating rentsfor the original knowledge producer. Tacit knowledge by definition cannot be articulated andthus cannot be transferred at arms-length.

Kirzner (1979) distinguishes between entrepreneurial knowledge and the knowledgeexpert, suggesting that it is the entrepreneur that hires the later. The knowledge expert doesnot fully recognize the value of their knowledge or how to turn that knowledge into a profitor else the expert would act as an entrepreneur. The entrepreneur may not have the depth ofspecific knowledge that the specialist has (such as technology expertise) but it is theentrepreneur who recognizes the value and the opportunity of the specialist’s knowledge.While the entrepreneur may have some specialized knowledge of a resource (i.e., technol-ogy), what makes the entrepreneur unusual is the entrepreneur’s function relies more on theirability to organize specialized knowledge. Thus the knowledge expert has specializedknowledge and the entrepreneur has generalized knowledge and it is through the firm that thetwo types of knowledge are joined to produce rents.

3. Ex post limits to competition

Regardless of the nature of the firm heterogeneity, sustained competitive advantagerequires that heterogeneity be preserved. If heterogeneity is not durable it will not addsustained value. This is the case when there are ex post limits to competition. Subsequent toa firm gaining a superior position there must be forces that limit competition (Peteraf, 1993),otherwise heterogeneous advantages dissipate. Ex post limits to competition can reflectcognitive differences, strategic complementarity, causal ambiguity, uncertainty, informationasymmetries, all of which are particularly important in entrepreneurial settings.

3.1. Entrepreneurial cognition and competition

Thinking on ex post limits to competition has typically been focused at the firm-level andwhether competing firms can readily acquire the necessary resources to return the market tocompetitive parity (Barney, 1991; Conner & Prahalad, 1996). We focus here on the cognitivemake-up and beliefs of individual entrepreneurs. Rather than the focus being on the long-term outcome of an entrepreneurial firm, we are interested in better understanding how those


with an entrepreneurial cognition see opportunities that others have overlooked and how theyare able to bootstrap together the necessary resources to start firms that attempt to exploitentrepreneurial opportunities.

After a new firm is launched with some initial success, those from the outside oftenquestion why they did not think of the idea first. Still others may indicate that they hadthought of the idea but never attempted to exploit it. In either case, the issue remains that theidea has been identified and initially developed into a business concept by an entrepreneur,not by those on the sidelines. Meanwhile, while those who wished that they had seen andacted on the concept first, the entrepreneur is often busy working and thinking aboutadditional inventions and business concepts. Most individuals tend to be concerned withprotecting themselves from emerging threats and changes, particularly in uncertain environ-ments, while those with an entrepreneurial cognition continue to probe for new opportunities.The competition for thinking of new firm opportunities tends to remain stable even thoughmany individuals seem to wish that they had had the foresight to capitalize on the entrepre-neurial opportunities once they become visible.

Ex post limits and entrepreneurial cognition provide a theoretical rationale for recentresearch that has identified habitual entrepreneurs as an important group of entrepreneurs(Westhead & Wright, 1998). Rosa and Scott (1999) found that the greatest growth occurredin companies that were embryonic business clusters rather than a single one-dimensionalbusiness. This suggests that the greatest source of new high-growth potential businessestends to come from entrepreneurs with existing businesses. Their unique ways of thinkingand experience with earlier ventures seems to provide a corridor for additional entrepre-neurial pursuits. Want-a-be entrepreneurs without an entrepreneurial cognitive makeup alongwith the lack of entrepreneurial experience are significantly restrained from competing in thedevelopment of future innovations.

3.2. Opportunity recognition

As indicated above in the theory of entrepreneurial cognition, the way some people thinkand make decisions allows them to function effectively in the pursuit of new inventions.Given that individual characteristics and decision styles cannot be readily transferred towant-a-be entrepreneurs, it becomes apparent that they are sources of competitive advantagein the entrepreneurial domain. We argue that this is true with opportunity recognition for thefollowing reason. Those with an entrepreneurial cognition perspective tend to use heuristic-based rather than factual-based logic often leading them to develop and assemble resourcesin new ways. Information is certainty important to those with a heuristic-based logic,however, it is often assembled in a nontraditional nonlinear manner. More factually orientedlogic builds from proven information and the rationale for a new opportunity needs toprogress in a logical manner. Since new inventions and opportunities rarely evolve in alogical manner, those with a factually oriented logic tend to become very frustrated by thenonlinearity of opportunity recognition while those with a heuristic-based logic tend to thriveon it.


3.3. Strategic complementarity

Schumpeter theorized that innovation proceeded in a jerky rather than an even fashion.After the initial entrepreneur has introduced a breakthrough innovation with some initialsuccess, other less capable entrepreneurs emerge with new businesses and incrementalinnovations that “swarm” the new enterprise with similar look-alike imitations. The appear-ance of the first (more qualified) entrepreneurs facilitate the appearance of others by makinginnovation easier for less qualified entrepreneurs, in essence innovation becomes increas-ingly familiar and we now have a “new processes” of innovation. The innovative success ofthe lead entrepreneurs result in an increase in the price of the means of production. Physicalunits of production are produced under conditions of constant returns to scale, characterizedby falling average cost but constant marginal cost. Resources that were once scarce and nowprofitable tend to become less scarce and heterogeneous advantages held by the leadentrepreneurs dissipate.

Schumpeter suggests that new combinations of resources are new ways of competing andthat these new ways of competing do not as a rule come from existing firms but rather fromnew firms that develop alongside established firms. This is consistent with the notion ofstrategic complementarity1 that suggests that when quantities of capital goods that arecomplements go up because of increased demand, the marginal productivity of the good israised and the demand goes up. If a firm currently exists it increases its output during thistime, this is also the time when new firms enter markets because of the increased demandcreated by the lead entrepreneur. Strategic complementarity is consistent with Schumpeter’sargument that the early entrepreneur appears alongside existing firms and then the swarm-like appearance of other (less qualified) entrepreneurs leads to many small firms forming enmass in a concentrated area. A familiar form of monopolistic competition characterizes theresulting equilibrium, though now instead of one large firm there is a large number of smallfirms. What has occurred is that total profits have likely minimized at the lowest level ofuncertainty and we now have firms functioning efficiently where as before there might havebeen waste which occurred as a result of reorganizing resources. The more imitativeentrepreneurs that enter during the monopoly stage the more uncertainty is minimized andprofits are redistributed possibly diluting total wealth. During this stage of the innovativeprocess endogenous innovation motivated by the leader entrepreneurs is sufficient to gen-erate robust, endogenous fluctuations in aggregate investment in new innovations (Evans,Honkapohja & Romer, 1996). In other words, the innovative entrepreneurial act of onceagain recombining new resources start a new cycle (Schumpeter, 1934). The entrepreneur’sability to continuously innovate is the primary competitive advantage of the entrepreneurialfirm, leading to sustainable entrepreneurial firms and sustainable wealth creation (Alvarez &Barney, 2001).

However, as firms get larger the costs of organizing additional transactions within the firmmay rise and the returns to the entrepreneurial function decrease (Coase, 1937). Once a firmreaches the point where the cost of organizing an extra transaction becomes equal to themarket costs either the market will organize the transaction or a new entrepreneur will enterand organize the new knowledge. The entrepreneurial knowledge of resource reorganizationthat is critical to the transformation of inputs into heterogeneous outputs becomes lost as the


firm grows (Coase, 1937) and the now large firm begins to resemble the market. If, theexplanation of entrepreneurship stops at this point, we have nothing more than a transactioncost story of entrepreneurship. What stops the cycle is the isolating mechanism of causalambiguity (Lippman & Rumelt, 1982).

3.4. Causal ambiguity

Causal ambiguity is the uncertainty regarding the causes of efficiency differences amongfirms. It prevents potential imitators from knowing exactly what to imitate and how toimitate. If as Schumpeter assumed that a firm must incur a fixed research and developmentcost before it can produce a new type of good, then these sunk costs along with theuncertainty of how to imitate may limit competition and preserve heterogeneity. Causalambiguity muddles the link between the resources controlled by a firm and a firm’s sustainedcompetitive advantage is not understood or understood only very imperfectly. The host firmdoes not always clearly understand this linkage, let alone its competitors or potentialcompetitors.

A central assumption of the knowledge-based view of organizations is that knowledgeaccumulates through the process of creativity and exploration and is implemented throughorganizational exploitation. As an individual firm uses its existing knowledge in explorationand exploitation, it (firm knowledge) grows and multiplies into new knowledge. Entrepre-neurial firms are often built around the founding entrepreneur who identifies the opportunityand moves to exploit it commercially. Often it is the founder (or founding team) whopossesses much of the technical and managerial knowledge that make-up the tangible andintangible assets of the firm. In sum, an entrepreneur’s expanding knowledge base andabsorptive capacity becomes an entrepreneurial firm’s competitive advantage.

The entrepreneurial firm’s absorptive capacity determines how successful the entrepre-neurial firm will be in obtaining entrepreneurial rents. Based on Cohen and Levinthal’s(1990) definition, “absorptive capacity is the ability to recognize external information,assimilate this information, and apply it to commercial ends” (p. 128). Cohen and Levinthal’sdefinition assumes that an organization’s absorptive capacity is “absolute.” In other words,the absorptive capacity of the organization is the same regardless of the situation or timing.However, several researchers (Lane, 1997; Lane & Lubatkin, 1998) have observed that theabsorptive capacity of the organization might be relative to the organization’s current contextor situation. Similar to a sponge that is slightly damp as opposed to one that is bone dry, thedamp sponge absorbs water faster.

Cohen and Levinthal’s original work on absorptive capacity only addressed issues oftechnological capabilities, but it also appears to have implications for managerial capabili-ties. Lane, Lyles and Salk (1998) suggest that managerial capabilities are acquired throughexperience and tend to be firm specific. Thus, firms differ in their level of “managerialabsorptive capacity” and by extension entrepreneurial absorptive capacity. The more entre-preneurs and their firms have previously absorbed in terms of entrepreneurial capabilitiessuch as opportunity recognition and the continuous innovation that transforms inputs intoheterogeneous outputs, the greater their absorptive capacity. Greater amounts of an entre-preneurial firm’s specific experience and learning contribute to the entrepreneurial firm’s


absorptive capacity creating causal ambiguity preventing other firms from imitating. In-creased learning and growing absorptive capacity tends to create higher levels of causalambiguity and growing difficulty for potential imitators.

Causal ambiguity may be the essence of entrepreneurship because when the reasons forfirm heterogeneity are poorly understood these reasons are often entrepreneurial in natureand thus difficult to imitate. However, when the reasons for heterogeneity are understood,even within the firm itself, the entrepreneurial knowledge becomes common knowledge thatcan be imitated by less qualified entrepreneurs.

4. Imperfect factor mobility

In discussing the imitation of valuable but nontradable asset stocks, Dierickx and Cool(1989), argued that the imitability of assets depends on the process by which it wasaccumulated. They identify the following conditions under which imitation may be limited:time compression dis-economies, asset mass efficiencies, interconnectedness of asset stocks,asset erosion, and causal ambiguity. The importance to resource based theory is that theseassets are inimitable because they have a strong tacit dimension and are socially complex. Inthe entrepreneurship domain, tacit socially complex assets are often specific to the founderand the organizations they create. These are idiosyncratic assets that are more valuable whenused in the firm than outside of the firm. These assets which are often intangible tend to bedifficult to observe, describe, and value but have a significant impact on a firm’s competitiveadvantage (Itami, 1987). For example some of these assets may include an entrepreneurialcognition that recognizes and generates new opportunities, build trusting relationships withother individuals and firms, and bootstrap together the necessary resources for a venture tosuccessfully launch. Two characteristics of these and other related assets is that they tend tobe characterized by social complexity and path dependence.

4.1. Entrepreneurship and social complexity

When a firm’s resources and capabilities are socially complex they are likely to be sourcesof sustained heterogeneity (Barney, 1995). Socially complex resources may be difficult toimitate because they are complex phenomena that are hard to systematically manage andinfluence. Since new ventures typically start with a founder, the socially complex phenomenaby definition occur outside the firm. While this has received little attention, the interactionbetween those with entrepreneurial cognition and the broader society creates an interestingcontext in which to understand how learning transpires reflecting a socially complex asset.

Many resources that lead to heterogeneity are socially complex such as firm culture(Barney, 1986) firm reputation (Hill, 1990), and human capital (Carpenter, Sanders &Gregersen, 2001). Similar to these other assets entrepreneurial ability, the accumulatedpractical skill or expertise that allows the entrepreneur to exploit opportunities efficiently, issocially complex. While it is possible to specify how this socially complex asset of entre-preneurial ability adds value to the firm, it is not easy to imitate and other firms cannot just


create entrepreneurial ability. We suspect that it may be the social complexity of entrepre-neurship that has hindered theoretical work on entrepreneurship.

The condition of social complexity is important to entrepreneurship because it reminds usthat complex technologies are not imperfectly imitable. It is the exploitation of thesecomplex technologies that involve the use of socially complex resources that is important.An entrepreneurial firm with a complex technology needs additional exploitation knowledge(such as entrepreneurial knowledge) to fully exploit its specialized knowledge (the technol-ogy) and sustain heterogeneity.

4.1.1. Opportunity awareness and resource acquisitionAs discussed above, entrepreneurial cognition provides important insights for understand-

ing why entrepreneurs often see and act on opportunities that others fail to recognize. Giventhe differences in the way entrepreneurs think and make decisions, these differences maylead to the development of some unique social interactions as well. More specifically, wesuspect that they use their “strength of weak ties” (Granovetter, 1982) to expose themselvesto a broader cross-section of people and situations that they in turn gives them the oppor-tunity to extrapolate and make extensions regarding new venture opportunities. While thenature of their social interactions tend to remain somewhat of an enigma, we suspect that partof who they are (a resource) and a potential advantage in new venture creation. Thisinteraction provides them with substantial exposure to unusual and different ideas andresources.

Information is an important part of the new venture process, and as noted above,information that entrepreneurs use in the discovery process and in starting new ventures isoften nonlinear in nature. We suspect that involvement by entrepreneurs in distant and variedsocial interactions facilitates the gathering of diverse, unusual, and sometimes specificinformation. Their strengths of weak ties gives them exposure to chaotic bits of informationthat sometimes get combined in usual ways and sometimes lead to new endeavors.

Furthermore, starting a new venture generally requires the accumulation of a variety ofresources with very limited financial capability (Brush, Greene & Hart, 2001). Here again wesuspect that the unique ways in which entrepreneurs think and expose themselves to a variedcross-section of social interactions allow them to accumulate the necessary and sometimesrare resources. Rare resources that an entrepreneur uses to create heterogeneous outputs mayoften comprise of rarely used assets and their availability becomes known through theentrepreneur’s diverse cross-section of acquaintances. Stated differently, the bootstrapping ofresources in an economical fashion that is so often necessary for a startup on a limitedbudget, is in itself a rare and valuable resource that can be brought together through anentrepreneurs diverse social connections.

4.1.2. The combining of resourcesIf we assume that entrepreneurship is as Schumpeter suggested, new production functions,

then firm heterogeneity is an outcome rather than a given (Rumelt, 1984). In a market viewthroughout the process of resource rebundling information asymmetries are removed and “noperceived opportunity for improving the allocation of resources is left ungrasped” (Kirzner,1979, p. 235). Resource-based theory extends the product market view to include factor


markets and suggests that firms wishing to obtain expected above normal returns fromimplementing factor market strategies must be consistently better informed about the futurevalue of those strategies than other firms in the same market (Barney, 1986).

During the process of rebundling resources waste occurs through knowledge imperfec-tions. In the bundling of resources, entrepreneurs use their available information to makedecisions to produce a product that utilizes the available resources in a superior and moreefficient manner. The information and its application and know- how are available to theentrepreneur through previous learning. The information owned by the entrepreneur isdeeply embedded, socially complex know-how of how to recombine resources and thisknow-how combined with entrepreneurial decision-making is a source of firm heterogeneity.

4.2. Entrepreneurship and path dependency

Resource based distinctive assets in an entrepreneurial context may also be evolutionary.In Schumpeter’s business cycle theory firms disrupting the cycle select new productionfunctions from a known bundle of current production functions. In other words the newdiscoveries are path dependent. In this view heterogeneous assets may depend upon pastentrepreneurial decisions and these decisions made by founders and future firm entrepre-neurial managers may be the DNA composition of the firm. Sustainable advantage is thus ahistory (path) dependent process (Barney, 1991; Nelson & Winter, 1982). Barney (1987)suggested that the role of chance and luck lead to the attainment of different superiorknowledge. We however contend that entrepreneurs are likely to develop different knowl-edge bases for coordinating their stocks of distributed knowledge because of their differentability to learn and understanding of how things work. It is the different paths that firms takethat account for differential capabilities, and potentially firm heterogeneity. In entrepreneur-ial firms, because they are often newly founded and small in nature the decisions made willhave an impact on the future of the firm. Important sources of firm differences may surfaceat this time in a firm’s history, sources such as patented technology and learning curves.Because of the unique conditions under which entrepreneurial decisions are made, firmspecific skills and resource combinations may result in long-term path dependent implica-tions for the firm.

In firms different people have different habits, thoughts, and models of the world thatpresent obstacles to the efficient coordination of their actions (Foss, 1999). Therefore, acollective knowledge base is required for coordination (Penrose, 1959). This collectiveknowledge base coordinates existing distributed knowledge but also coordinates intrafirmlearning processes. Indeed, coordinated knowledge bases help the firm organize a localizeddiscovery process. These choices are not necessarily obvious choices but instead are choicesthat are determined by the initial founding conditions of the firm.

Still, if firms produce certain outputs using a given set of inputs over a long period of time,these firms will not survive. To be successful for any length of time a firm must innovate(Rumelt, 1987). Since innovation requires a certain amount of pre-existing capabilities(Schumpeter, 1934), firms need to be able to learn. In order for firms to innovate the skillsand resources to sustain innovation must be present. Finally, innovation often leads to certainother types of innovation that build on previous learning.


5. Ex ante limits to competition

The last condition for a sustainable advantage is that there must be ex ante limits tocompetition. In other words for a firm to enjoy a sustainable advantageous position theremust be limits to competition. As discussed above, Schumpeter’s business cycles start withequilibrium and then the entrepreneur disrupts the cycle through innovation. Other lesscapable entrepreneurs imitating the innovation and dissipating the competitive advantage ofthe first firm then follow this disruption. Schumpeter (1934) called the down time a time ofdepression.

However, if the entrepreneurial firm has resources that are causally ambiguous theseresources will be costly and difficult to imitate and the advantage enjoyed by this first firmwill not be dissipated. Causal ambiguity is a barrier to entry for potential competitors becauseit is almost impossible to imitate a product that has ambiguous factors. In a Schumpeteriancompetitive environment, firm survival is the capability to innovate, and to make thatinnovation profitable again and again.

However, as firms get larger the costs of organizing additional transactions within the firmmay rise and the returns to the entrepreneurial function decrease (Coase, 1937). Once a firmreaches the point where the cost of organizing an extra transaction becomes equal to themarket costs either the market will organize the transaction or a new entrepreneur will enterand organize the new knowledge. Despite the survival problem with smaller firms, Coase(1937) theorized that innovation and entrepreneurship are particular to the small firm.

6. Conclusion

We have examined the role of entrepreneurial resources within the RBT and advanceentrepreneurship theory by suggesting how these resources might be unique to entrepreneur-ship. By focusing on resources, from opportunity recognition to the ability to organize theseresources into a firm and then to the creation of heterogeneous outputs through the firm thatare superior to the market, we help identify issues that begin to address the distinctive domainof entrepreneurship. We can also now begin to probe when the entrepreneurial firm a superiorchoice to the market for the exploitation of new opportunities.

Within the field of entrepreneurship, Shane and Venkataraman (2000) have criticized thework on small and new businesses and a focus on either the performance of individuals orof the firm. They argue that a focus on firm performance is unique to strategic managementresearch and thus cannot be unique to entrepreneurship. Furthermore, they suggest thatperformance approaches do not adequately test entrepreneurship because, “entrepreneurshipis about the discovery and exploitation of profitable opportunities” (Shane & Venkataraman,2000, p. 217) and a focus on performance may exclude the analysis of the opportunity costsof other alternatives.

While firm performance is an excepted paradigm in strategic management, performanceis also a nontrivial part of entrepreneurship research. Wealth creation, which in the case ofthe firm is driven by firm performance, appears to be central to both entrepreneurship andstrategic management (Hitt, Ireland, Camp & Sexton, 2001). Recent research illustrates how


entrepreneurship and strategic management inform each other and their overlapping inter-ests, such as firm adaptation to environmental change, modes of organizing and the exploi-tation of opportunities (Venkataraman & Sarasvathy, 2001). Therefore to try to define thedistinctive domain of entrepreneurship by excluding that which also is studied by strategicmanagement is like a production of Romeo and Juliet with only one of them in the production(Venkataraman & Sarasvathy, 2001). This is not to say that entrepreneurship and strategicmanagement should not continue seeking to clarify their specific domains. Indeed, someentrepreneurship scholars are seeking to better identify the distinctive domain of entrepre-neurship (e.g., Shane & Venkataraman, 2000; Busenitz et al., 2001). Still, entrepreneurshipscholars should not “shy” away from an area of research simply because some researchersare examining a question or theory in another discipline. Instead we in entrepreneurship needto apply our own unique lens to the examination of these questions and theories.

This paper extends the efforts to better clarify the domain of entrepreneurship in twoimportant ways. First, we show how theory (RBT in this case) from another area of inquirycan be a very helpful exploration tool for probing and better understanding entrepreneurshiprelated phenomena. We use RBT to show how entrepreneurship generally involves thefounder’s unique awareness of opportunities, the ability to acquire the resources needed toexploit the opportunity, and the organizational ability to recombine homogeneous inputs intoheterogeneous outputs. Looking at these from a multiple levels of analysis perspectiveinvolves significant truncation or problems with theory development. By analyzing thesedifferent aspects of entrepreneurship as unique resources we resolve the level of analysisproblem and should facilitate better theory development. Furthermore, our development ofthe entrepreneurship in RBT paves the way for addressing important research questions. Forexample, one such question might be under what conditions is the firm the most efficient wayof exploiting economic opportunities identified by entrepreneurs?

Second, by looking at RBT through an entrepreneurial lens, we have extended theboundaries of and enriched RBT. While others have made the connection between entre-preneurship and RBT (e.g., Chandler & Hanks, 1994; Brush et al., 2001), we have deliber-ately set out to develop the entrepreneurship side of RBT. In doing so, we shed new light onhow resources come into existence and how individuals sometimes embody bundles ofheterogeneous resources that allow them to repetitiously create new entrepreneurial oppor-tunities through the firm.

Entrepreneurship researchers have sometimes pointed towards and hoped for a singletheory of entrepreneurship. Without a unified theory, it is assumed that the field of entre-preneurship will continue to be disjointed and a melting pot of diverse research positions. Wedo not think that entrepreneurship necessarily needs a single theory because theory is not theend but rather the means to an end. The focus of entrepreneurship researchers should be toaddress interesting and important research questions that better explain and predict currentlyvague phenomena. If a specific theory, regardless of its field of origin, is a tool that enablesus to better probe and explain a phenomenon of interest, then so be it. However, that whenusing specific theory from outside the domain of interest, the boundaries frequently getchallenged or extended or the theory enriched, all of which can be important contributions.We think that taking an entrepreneurial lens to the RBT as we have done in this paperillustrates this two-way contribution.


As a result of taking an entrepreneurial perspective, one contribution to RBT is that we arenow able to identify resources such as entrepreneurial alertness, insight, entrepreneurialknowledge, and the ability to coordinate resources, as resources in their own right. Moreover,distinctions have been made between RBT and knowledge theories of the firm and dynamiccapability theories, a characterization that RBT is Ricardian and not Schumpeterian (Car-penter, Sanders & Gregersen, 2001). However, we argue in this paper these distinctions areartificial, knowledge and dynamic capabilities are an extension of the boundaries of RBT.We take a Schumpeterian perspective to RBT by suggesting that the act of combininghomogenous and heterogeneous resources is a resource.

Notes

1. Strategic complementarities arise when the optimal strategy of an agent dependspositively upon the strategies of the other agents. Multiple equilibria and a multiplierprocess may arise when strategic complementarities are present. Strategic comple-mentarities arise from production functions, matching technologies, and commoditydemand functions in a multisector, imperfectly competitive economy (Cooper &John, 1988).

Acknowledgment

The authors wish to thank Duane Ireland and two anonymous reviewers for their com-ments and suggestions on an earlier draft of this paper. We also wish to thank Jay Barney forhis insightful comments and wonderful conversations.

Sharon Alvarez is an assistant professor of entrepreneurship at the Max M. Fisher Collegeof Business, The Ohio State University. She received her BSBA in business from theUniversity of Colorado, an International MBA from the University of Denver and her Ph.D.from the University of Colorado in Strategy and Entrepreneurship. Her work experienceincludes such companies as Hiram Walker, LTD., Celsius Energy, and Texaco Inc. Dr.Alvarez has started and owned a small business, has served on the board of directors forsmall businesses and she consults in the biotechnology industry. Her current researchincludes high technology alliances between entrepreneurship firms and larger establishedfirms, IPO’s, and entrepreneurship theory.

Lowell Busenitz is an associate professor of management at the University of Oklahomawhere he teaches strategic management and entrepreneurship. His research interests includecognition and how entrepreneurs make strategic decisions, resource based theory, andventure capitalist involvement in entrepreneurial firms. He has published in the Journal ofBusiness Venturing, Academy of Management Journal, Academy of Management Review,Academy of Management Executive, and Entrepreneurship Theory and Practice amongothers.


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